The Measurement Division of Flow Co Flow Has Recently Purchased a Small Company Which Makes Sprinkler

question 55

Essay

The Measurement Division of Flow Co.produces pumps which it sells for $20 each to outside customers.The Measurement Division's cost per pump,based on normal volume of 500,000 units per period,is shown below: $$\begin{array} { | l | r | } \hline \text { Variable costs } & \$ 12 \\\hline \text { Fixed ouerhead } & \underline{3} \\\hline \text { Total } &\underline{ \$ 15} \\\hline\end{array}$$
Flow has recently purchased a small company which makes sprinkler systems.This new company is presently purchasing 100,000 pumps each year from another manufacturer.Since the Measurement Division has a capacity of 600,000 pumps per year and is now selling only 500,000 pumps to outside customers,management would like the new Sprinkler Division to begin purchasing its pumps internally.The Sprinkler Division is now paying $20 per pump,less a 10% quantity discount.The Measurement Division could avoid $1 per unit in variable costs on any sales to the Sprinkler Division.Required:
a.Treating each division as an independent profit center,within what price range should the internal sales price fall?
b.Now assume that the Measurement Division is selling 600,000 pumps per year on the outside.Determine the appropriate transfer price.Show all computations.(Note: Due to limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

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Definitions:

Peer Evaluation

A method where employees evaluate the performance and contributions of their colleagues, often used for developmental or rewards purposes.

Lenient

Showing a merciful or tolerant attitude towards someone or something, often less strict than expected.

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Evaluations or assessments that indicate exceptional performance or quality above the standard or expected level.

Professional Raters

Individuals trained to assess performance or characteristics in a standardized and unbiased manner.